Markup Variation and Endogenous Fluctuations in the Price of Investment Goods

23 Pages Posted: 16 Jun 2009

See all articles by Max Floetotto

Max Floetotto

Stanford University

Nir Jaimovich

University of Zurich

Seth Pruitt

Arizona State University (ASU) - Finance Department

Date Written: March 31, 2009

Abstract

The two sector model presented in this note suggests a simple structural decomposition of movements in the price of investment goods into exogenous and endogenous sources. The endogenous fluctuations arise in the presence of countercyclical markups which vary differently across the consumption and investment sectors. In turn, the movements in the markups are due to endogenous procyclical net business formation. The model, while being consistent with the countercyclicality of the price of investment goods, suggests that about a quarter of the movement in the price series can be attributed to this endogenous mechanism.

Keywords: Price of investment, business cycle, firm dynamics, markup

JEL Classification: E32, L11, L16

Suggested Citation

Floetotto, Max and Jaimovich, Nir and Pruitt, Seth, Markup Variation and Endogenous Fluctuations in the Price of Investment Goods (March 31, 2009). FRB International Finance Discussion Paper No. 968, Available at SSRN: https://ssrn.com/abstract=1420234 or http://dx.doi.org/10.2139/ssrn.1420234

Max Floetotto (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

HOME PAGE: http://www.stanford.edu/~maxf

Nir Jaimovich

University of Zurich ( email )

Seth Pruitt

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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